Positive credit reporting in Australia

I’ve written about innovation in the Australian banking sector in the past.

The launch of the new GetCreditScore website by peer to peer lender Society One makes it clear that banks still have a long way to go in terms of innovation.

The introduction of the new website is a result of the introduction in Australia of the Positive Credit Reporting system. This new system requires Australia lenders to reconsider their existing lending practices and this will have a huge impact.

What is positive credit reporting and why is it important?

In March 2014. changes to the Australian Privacy Act became effective introducing so-called ‘positive credit reporting’. This replaces the ‘negative credit reporting’ system that has been in force since 1991. The negative credit reporting system is quite limited. It only shows credit providers if someone applied for a credit but it doesn’t show if that person has been successful or not. If you got the loan, the negative reporting system will not show if you repayed the loan on time but it will show any loan defaults.

A positive credit report is much more comprehensive and contains amongst others information on repayments. Ultimately it will give lenders a much better understanding of your ability to repay debts.

The new credit scoring system looks very promising for consumers with good repayment habits. But it is only early days and it will take time before the banks will start using the data as intended so that meaningful positive credit scoring can be done.

Positive credit reporting important for the peer to peer lending industry

Rating borrowers in the peer to peer space on unsecured loans (a loan which is not supported by collateral) is critical to the success of the industry. It just won’t be about a credit score anymore but your behaviour will be closely monitored. Big Brother is Watching You!

Thousands of people have tried today to access the new GetCreditScore website. They will be disappointed however. It is too early to ring your bank and give them your credit score to get a better rate. It’s not yet part of their loan process and the way they score risk. Also, nobody knows yet how to interpret the data. What is a good score?

Rate for risk

I think the move to positive credit scoring is a good one. It allows people to become more aware of their personal debt and the way they manage their finances. In time it will lead to lending becoming more ‘rate for risk’ instead of a same rate for everyone regardless of your risk profile.

In the future, good financial managers will be rewarded with lower rates on personal loans. However, this will take time and a lot of education. It also requires a massive amount of cooperation between all parties involved in the lending process to be able to provide and process positive credit scoring data.